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Don’t Rely on Markets to Plug Pension Shortfall, Prudential Says

(Bloomberg) -- Prudential Financial Inc. has a warning for the more than half of S&P 500 companies that have underfunded pensions: Waiting for the market to ease the pain of that shortfall won’t help.

A typical pension-plan sponsor has “virtually no chance of earning its way to fully funded status,” meaning the company will have to put more money into the retirement plan, according to a report from the life insurer. Taking an average plan that is 84 percent funded and building in various assumptions about asset allocation and returns, Prudential found there’s less than a 1 percent chance the employer will get to 100 percent in four years without making any contributions.

Prudential’s analysis underscores the challenges that companies face as low interest rates, which increase pension liabilities, and substantial payouts to retirees temper the benefits generated by rising equity markets. Employers might want to shove more money into plans now and take advantage of the ability to deduct contributions under the old tax rate until Sept. 15, the insurer said.

Prudential has been winning deals to take on pension obligations from employers such as General Motors Co. and Verizon Communications Inc., getting more assets to oversee and invest.

“Relying on capital markets alone to close these funding deficits is unrealistic,” the company said in the report. “It will take contributions to close this gap, and now is the time to fund.”